Ofgem reforms bring more transparency to company profits
Press release
- Publication date
- Industry sector
- Supply and Retail Market
- Generation and Wholesale Market
- New requirement for independent audit of suppliers’ annual statements
- Faster publication – six month deadline reduced to four months after year end
- Greater clarity on main cost drivers behind customer bills
New rules proposed today by Ofgem will make information on energy company revenues, costs and profits more robust, useful and accessible. The rules, expected to come into force next year, include a requirement for the companies to have their annual segmental statements independently audited, which will increase consumer and business confidence that profits are being reported accurately. Companies will also be required to publish their statements no later than four months after their financial year end.
A further key reform aims to increase understanding of the main cost drivers behind customer bills, and ease comparison between statements, by requiring companies to report their costs under a common set of categories. These are: wholesale costs; network costs; environmental and social obligations costs; and supplier operating costs. The 2013 statements included these categories for the first time; further work will be undertaken with the companies to refine the current guidelines on how to allocate costs to these categories in all future statements. An independent review of the companies’ transfer pricing practices, commissioned by Ofgem this year, provides even greater confidence that the 2013 statements give an accurate picture of profits in the different segments of their businesses.
Since 2009 Ofgem has required the six large energy companies to produce annual statements showing the actual revenues, costs and profits of their generation and supply businesses. Today’s package of reforms is part of Ofgem’s commitment to make the financial information available as robust, accessible and relevant to consumer and stakeholder concerns as possible.
Rachel Fletcher, senior partner for Ofgem’s markets division, said: “With energy prices rising and many struggling to pay their energy bills, there is understandably significant public interest in the profits of the large energy companies, and particularly the profits of their retail businesses. Our proposed reforms are providing increased transparency on company profits. This is important to inform public debate, encourage competition and to help suppliers rebuild customer trust.”
Ofgem has also today published its analysis of the companies’ 2013 statements. The revenues, costs and profits of the large energy companies in 2013 summarises the results and compares them across companies, market segments and over time.
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Notes to Editors:
1. Ofgem’s summary review of the 2013 consolidated segmental statements
Ofgem’s review of the 2013 statements shows that total profits across all six companies in their generation and supply businesses fell from £3.5bn in 2012 to £2.8bn in 2013. Overall, 2013 profits were at their lowest level since the companies started producing the statements in 2009. The fall is largely due to lower profits in generation, which fell in 2013 despite rising revenues. This is because of significant cost increases resulting from the closure of previously profitable plants.
Profits in millions across the six largest suppliers before tax and interest payments are made
Operating profits in supply of energy to domestic customers have increased in aggregate since 2009, mainly as result of loss-making suppliers becoming profitable. In 2009, three of the six large suppliers made losses in this segment of the market. In 2013, only EDF continued to make a loss in domestic supply. The very large disparities that were apparent between the six large suppliers in 2009 have diminished over time.
Profits in the domestic supply market have fallen slightly between 2012 and 2013, providing an average pre-tax profit margin of 3.9 per cent. In 2012 the average dual fuel household bill was £1,174, of which £53 was operating profit, compared with £48 out of an average bill of £1,225 in 2013.
This table shows how average bills across all six suppliers are broken down into different cost elements, together with the supplier’s operating profit (ie before tax and interest).
2. Ofgem commissioned an independent expert assessment of how the large energy companies use transfer prices to allocate costs, revenues and profits between their supply, generation and trading business segments. This review by BDO accountancy partnership, also published today concluded that the methods used by each of the companies are appropriate, in line with global accounting standards, and properly reflect profits for the different parts of the business represented in the statements.
For further press information contact:
Kate Wilcox: 020 7901 7113
Chris Lock: 020 7901 7225
Dafydd Wyn: 020 3263 9943
Lisa O’Brien: 020 7901 7426
Out of hours media contact number: 07766 511470